UK Watch: BoE review: Patient hold

Research evidence excerpt

UK Watch: BoE review: Patient hold

st(UK)

Overall, the door is still open to hikes if the energy price shock is prolonged or second +44 20 7996 4855

ksharma32@bofa.com

round effects show up. But the reaction function seems to suggest that if the fall is

energy prices is sustained and second round effects remain limited, then risks of a look

through from the BoE is likely to rise. Our call for hikes in July and September is subject

to risks. The peace deal, dovish data and BoE’s caution have increased risks of one

delayed or no hike at all. We will be reviewing our BoE call shortly.

Rates: Will inflation go through to second round?

Front-end rates repriced some 1-2bp lower around the release, with November MPC-

dated Sonia rallying the most (3bp), with the first 25bps hike now only priced by

December. At the front-end, risks to market pricing continue to appear skewed to the

downside. Further out, the long-end should trade sensitively to political risks around the

by-election. While bear-flattening dynamics in the US could pose some risk to our

steepening bias given historical correlations, we would expect any US-led selloff to

affect the 10y point while the 2y remains anchored by BoE Bank Rate expectation.

FX: Super Thursday; one down, one to go

The BoE was first of two event risks, the other being Makerfield by-election which had

driven a meaning spike in overnight GBP implied vol. Focus now turns to tomorrow’s

election results. As for the BoE, we had been increasingly coming around to the view

that narrative had perhaps overtaken this meeting, and it would have a limited impact on

FX. This scenario played out but of more substance, we think the BoE reaction function

has potentially pivoted from activist (rate hikes) to risk management (wait and see). This